In hunt for yield, Japan insurers bet on project finance

TOKYO (Reuters) - Project finance investment by Japan’s top insurers jumped nearly fivefold in the year to the end of March as they sought higher returns after years of persistently low interest rates.

FILE PHOTO: People are silhouetted as they walk past an advertisement board of Japanese life insurer Meiji Yasuda Life Insurance Company in Tokyo July 28, 2009. REUTERS/Stringer/File Photo

Their foray into the $230 billion global loan market for infrastructure and energy projects underscores the challenge they face. Years of massive economic stimulus in Japan has suppressed yields on the insurers’ staple investment diet of Japanese government bonds (JGBs).

Reuters calculations based on data provided by the companies show that project finance investment by Japan’s top four life insurers has jumped nearly fivefold in the financial year to March 31 to about 160 billion yen ($1.5 billion).

The four are Nippon Life Insurance Co, which made up the bulk of the overall project finance dealmaking, Dai-ichi Life Insurance Co (8750.T), Meiji Yasuda Life and Sumitomo Life.

Lenders in project finance rely on cash generated by the projects for returns, making it a riskier investment than conventional corporate loans.

Shinji Kuge, general manager at Nippon Life Insurance Co’s structured finance department, said project finance does “take time and effort. But returns in proportion to risks taken are good.”

He said average project finance loans have margins of 150-200 basis points over benchmark LIBOR rate, or London inter-bank offered rate (LIBOR).

That would compare with single-digit basis-point margins over LIBOR on typical corporate loans, industry officials said, and a 30-year JGB currently yielding just 0.76 percent.

As Japan’s largest private-sector life insurer, with $700 billion in assets, Nippon Life has committed to about 10 overseas project finance deals totaling 120 billion yen this financial year. They include a A$176 million loan to a desalination project in Australia.

Dai-ichi Life, Japan’s second-largest private-sector life insurer has been investing in overseas project finance since 2014. This financial year though, it is participating for the first time in project finance loans in primary syndication, as opposed to buying existing loans in secondary market.

“Given tight credit spreads, we are looking for fields where not many investors have entered yet,” said Akinao Nishio, general manager at Dai-ichi Life structured finance group.

Its deals include loans to the UK High Speed 1 railway line project, a 109-km (68-mile) high-speed rail line to connect London’s St Pancras International station with the Channel Tunnel linking Britain and France.

The insurer has announced four project finance deals totaling about 25 billion yen ($236 million) this financial year. New deals are likely to be closed soon, Dai-ichi officials said.

A Sumitomo Life spokesman said the company was diversifying its investments.

“We would like to step up efforts in the area,” he said.

A Meiji Yasuda Life spokesman said “secondary deals are likely to be our main focus in the next financial year (starting in April) but we would consider primary deals if there are good ones.”

Insurers do not disclose their annual investments but their financial statements show their total portfolio allocation. The biggest portion of their funds remains in Japanese bonds at 30-40 percent.

Nippon Life has said its overall investment portfolio in the current financial year is likely to increase by about 1.5 trillion yen, out of which 120 billion yen is being directed to project finance.